AUSTRALIAN INTEREST RATES – Where to from here: By Urban Money

Earlier this month the Reserve Bank of Australia left the official cash rate on hold at the all time low of 1.5% for a sixth straight meeting on signs the Australian and global economy is strengthening and business investment has picked up.

BUT WHAT WILL HAPPEN TO AUSTRALIAN INTEREST RATES LATER THIS YEAR AND INTO THE LONGER TERM?

Some commentators predict that rate rises are now inevitable and mortgage holders in Australia should now start preparing for a gradual rise in interest rates.

Key to the long term interest rate outlook in Australia is what will happen in the United States.

In particular, Australian policy makers are paying close attention to developments in the US.

Until now Reserve Bank of Australia has, in some ways, been acting in isolation from major economies around the world defaulting to a low rate holding pattern when it comes to monetary policy.

The Reserve Bank of Australia has tread a fine line of spurring the Australian economy by keeping rates relatively low, but because our rates are considered high when compared to countries like the United States, it means investors look to the Australian Dollar which in turn keeps the Australian Dollar higher than it otherwise would be. Which is great if you are travelling overseas, but not so good if you are an Australian exporter.

A series of rate hikes in the United States would help the Reserve Bank of Australia keep the Australian dollar low which in turn would act to spur the post-resources boom recovery while also helping to prevent a housing bubble from forming in Australia by ‘offsetting’ any rate rise in Australia.

The troublesome scenario for policy makers is, not if, but when interest rates rise.

Mortgages are usually one of the biggest financial commitments a household will make and because rates in Australia have been a record lows for so long it becomes a tempting proposition to financially overextend which makes small incremental interest rate increases more significant for large mortgage holders.

“It is inevitable that interest rates will eventually rise and I would encourage those seeking home finance and those already with a mortgage to start preparing for a rate rise now. I know some customers who are already pretending the rate is 0.5% higher than it actually is so when rates do change, they know they can adapt to the changes in their finances,” Geoff said.

If you are looking for ways to save money in readiness for a potential interest rate rise check out our Urban Money blog. We have a number of articles specifically designed to help you save money.

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